Medical Device-Tax Delay Turns Focus of U.S. Budget Fight

About $30 billion in medical-device taxes that are helping to fund Obamacare has become one of the main sticking points in congressional negotiations to end the U.S. government shutdown.

The House of Representatives, led by Republicans, plans to vote as early as today on a debt-limit bill that includes a two-year delay in the medical-device tax. Senate Majority Leader Harry Reid, a Nevada Democrat, intends to reject any budget resolution or debt deal that includes a repeal of the tax.

Johnson & Johnson, NuVasive Inc. and other medical-device makers have repeatedly sought a reprieve since the tax was enacted as part of the Patient Protection and Affordable Care Act of 2010, known as Obamacare. While repeal is expected to have a greater effect on smaller companies, it has become the industry’s chief goal among changes sought to the health law, Lawrence Biegelsen, an analyst at Wells Fargo in New York, said.

“So many medical-device companies are venture-funded, or have grown up out of hospitals,” said Dan Mendelson, chief executive officer at Washington-based consultant Avalere Health LLC. “They have very effectively framed this as a tax that harms innovation.”

The tax, which took effect in January, is projected to raise $30 billion over a decade and is among new fees and spending cuts facing the health-care industry to help pay for Obama’s $1.4 trillion plan bill to expand medical coverage. The tax may reduce 2013 earnings per share for the device industry by a median of 4 percent, Biegelsen said in Sept. 30 a note.

Earnings Effect

NuVasive, a San Diego-based maker of products used in spinal surgery, is among companies expected to pay the most, with the tax reducing annual earnings per share by 18 percent, Biegelsen said. Boston Scientific Corp., based in Natick, Massachusetts, will see earnings cut by 7.5 percent.

Stryker Corp. of Kalamazoo, Michigan, St. Jude Medical Inc. of St. Paul, Minnesota, and Minneapolis-based Medtronic Inc. will see a 4.5 percent reduction, he said, basing his estimates on company reports.

The tax will reduce earnings at New Brunswick, New Jersey-based J&J, the world’s biggest maker of health-care products, by 1.4 percent, Biegelsen wrote.

Cindy Resman, a spokeswoman for Medtronic, Ernie Knewitz, a J&J spokesman, and Amy Jo Meyer, a spokeswoman for St. Jude Medical, all declined to comment. Ryan Davenport, a spokesman for Boston Scientific, also declined to comment.

Grand Bargain

The tax so far hasn’t hurt the industry’s sales or stock performance. The Standard and Poor’s 500 Health Care Equipment Index has risen about 18 percent this year. Boston Scientific shares have doubled, St. Jude’s are up more than 50 percent and J&J has gained almost 30 percent.

While delaying the tax would be a financial boon for companies, it would leave the Obama administration searching for other revenue streams to plug that gap in funding for the health-system overhaul.

“A repeal of the medical-device excise tax would result in large drop in tax revenues that would need to be offset by tax increases or spending cuts,” Martin L. Milner, a tax partner in the Washington office of McDermott Will & Emery LLP, said in an e-mail “As a result of the necessary revenue offset, I do not think the medical device excise tax will be repealed absent a grand bargain that includes fundamental tax reform.”

Reid’s opposition to the Republican efforts for tax repeal may be the only thing standing in the way. At least 15 Senate Democrats, including Senator Richard Durbin of Illinois, sought an 11th-hour delay to implementation of the tax in December. Reid, who controls voting matters in the Senate, rejected the idea then and said today that the House legislation won’t pass the Senate.

Senate Talks

“The introduction of this measure by House Republican leadership is unproductive and a waste of time,” Reid said in a speech on the chamber floor. “Let’s be clear the House Republican legislation won’t pass the Senate.”

That’s setting the stage for another showdown between the House and Senate, whose disagreements over Obamacare and other fiscal policy have shut down the federal government for 15 days and pushed the U.S. Treasury closer to running out of borrowing authority as early as this week.

The legislation emerging in the Senate would stave off a potential default, end the government shutdown and change the immediate deadlines in favor of three new ones over the next four months. It’s far from complete as the Senate may delay passing the plan and House Republicans are seeking changes. The House proposal is designed as a Republican alternative and, like the Senate proposal, would fund the government through Jan. 15, 2014, and suspend the debt limit until Feb. 7.

Insurance Changes

In addition to the device-tax delay, the House Republican alternative would prevent the government from making any employer-side contribution to the health insurance of members of Congress, the president, the vice president and the cabinet.

It’s unlikely that Obama would go along. The president has insisted that Congress raise the $16.7 trillion U.S. debt limit without add-ons and that stopgap spending bills be free of policy conditions, especially those tied to his health law.

“The president has said repeatedly that members of Congress don’t get to demand ransom for fulfilling their basic responsibilities to pass a budget and pay the nation’s bills,” a White House spokeswoman, Amy Brundage, said in an e-mail. “Unfortunately, the latest proposal from House Republicans does just that in a partisan attempt to appease a small group of Tea Party Republicans.”

Obamacare Delays

The Affordable Care Act’s rollout has already been tripped up by industry lobbying efforts to nix certain provisions, political bickering over how the law would function and problems setting up the technological backbone for the new online insurance exchanges.

The administration in July delayed enforcement of the so-called employer mandate, giving businesses until 2015 to comply with a requirement that companies with 50 or more workers offer employees insurance or pay a penalty.

Last month, the U.S. Department of Health and Human Services said small businesses in 36 states would have to wait an extra month, until Nov. 1, to begin enrolling in its online marketplace. The administration had said April 1 that workers at small companies wouldn’t immediately be able to pick any health plan they want, as the law intended. Instead, employees will have to use the plan selected by their employers.

Yesterday’s version of the Senate plan would postpone a separate provision of the Affordable Care Act. A reinsurance fee the government is levying on health plans would be delayed, according to a person familiar with the talks and a Senate Democratic aide who requested anonymity. Labor unions, aligned politically with Democrats, have asked for the delay.

That provision and the Senate Republicans’ language on income verification for subsidies used with the new online marketplaces may both get dropped, the person familiar with the talks said.

Before it's here, it's on the Bloomberg Terminal.